Faltering Finanzplatz

Realists put a dent in Frankfurt's aspirations

TWO McKinsey consultants recently and unwittingly stoked the debate over Frankfurt's future as a financial centre. Their private memo to the heads of Dresdner Bank, Germany's third-biggest bank, and Deutsche Börse, operator of the city's stock exchange, declaring that Finanzplatz Frankfurt was “falling apart”, was leaked to the Frankfurter Allgemeine Sonntagszeitung, a Sunday newspaper.

Not so, howled the stalwarts of the city's financial industry, including the local bosses of American investment banks. Frankfurt is the most important continental European centre, they insisted, even if most securities, foreign-exchange and derivatives trading has moved to London. The classic investment-banking disciplines, such as origination and sales of debt and equity financing, and mergers and acquisitions, still need bankers on the ground. Two American investment banks, Goldman Sachs and Morgan Stanley, have hundreds of people in Frankfurt.

Yet Frankfurt once had greater ambitions: look at the still-growing forest of bank headquarters known as Mainhattan (after the Main, the river on which the city stands). Dresdner Bank is building a second tower for which it has little obvious use. Commerzbank, Germany's number-four bank, recently opened a 500-desk trading-room, the biggest in Europe, that it cannot fill.

Frankfurters fear that they may lose their core institutions. Dresdner is owned and run increasingly tightly by Allianz, a big insurer based in Munich. Commerzbank is expected to be bought sooner or later, perhaps by HVB Group, a Munich bank. Although Deutsche Bank, Germany's biggest, denies that it would ever quit Frankfurt, it relies heavily on investment banking, which it runs out of London and New York. Its Swiss boss, Josef Ackermann, last year showered at least $500,000 on New York's bid to host the 2012 Olympic Games, overlooking Frankfurt's competing bid.

Frankfurt's defenders point to the city's excellent infrastructure and its geographical position, right in the middle of an enlarged European Union. Some powerful institutions are there to stay: the Bundesbank and the European Central Bank; KfW, a state-owned development bank; the agency that manages government debt; Germany's biggest stockmarket; and the securities arm of Germany's financial watchdog. An upswing would soon fill empty offices, say many, and restore the self-confidence of the late 1990s, the heyday of the Neuer Markt, Deutsche Börse's now-defunct new-economy stockmarket.

Recovery, though, will not come without a restructuring of Germany's banking sector. This is under way, up to a point: despite labour laws that discourage lay-offs, banks are shedding workers by the tens of thousands. But deep problems remain. State-backed banks, with a 40% retail-market share, have distorted prices for years and made corporate lending unprofitable. A top marginal rate of income tax of over 50% is no incentive for high-flyers to move to Frankfurt. The federal government in Berlin and the local state government of Hesse, in nearby Wiesbaden, have been slow to draft reforms that would favour Frankfurt.

The McKinsey crew may nonetheless have triggered a positive response. Hans Eichel, Germany's finance minister, says that the next Financial Markets Promotion Act, the fifth since 1990, will improve Frankfurt's competitive position and attract, among others, hedge funds. Is this the same Mr Eichel who a year ago railed against hedge funds because of their danger to financial stability?